Fraud is on the rise in lending — here’s how to spot it quickly

2021 was a year of recovery for the entire automotive industry, and for dealers in particular. Showroom traffic increased even during a once-in-a-generation inventory shortage and COVID-19 variants dragging on nationwide. F&I profits were a bright spot as PVRs reached record highs and became a big driver in helping to recoup lost revenue during the early days of the shutdown in 2020.

All good news, right? Not so fast

According to a landmark survey by Point Predictive, 2021 was a record year for fraud of several types. Synthetic fraud (literally creating a person’s entire credit profile from several different sources often called ‘Franken-Fraud’), fake employers, straw purchases, and income misrepresentation. 

It’s not like any of this is new. Fraud has always been a concern in the F&I office for as long as there has been a lot of financing, whether it stemmed from unethical practices among staff or customers lying about almost everything to get approved. It can get ugly and unfortunately, dealers are the ones who bear the brunt of the consequences of fraudulent activities no matter where they originate.

A deeper look at the numbers

According to the survey, which was conducted across 29 national automotive lenders, 2021 was a record year for all major types of fraud in F&I. $7.7 billion dollars in auto loan fraud alone, and industry predictions are pointing to a rise in 2022. 1 out of 5 lenders also reported that their biggest threat for the near future is fraud.

Misrepresentations were the most chilling finding at a 260% increase over 2020. Overstating income is probably the most common type of fraud due to borrowers knowing that on a busy Saturday, F&I managers won’t be able to easily verify income before the car is delivered. It’s a difficult balancing act and usually, discrepancies are not uncovered until after the car is over the curb.

Falsified paystubs increased 22% over 2020 and represent another difficult type of fraud to spot when the pressure is on to get through the F&I process through to delivery. And worse still…$1 billion dollars of fraud has been tied to the increase in fake employers. 

When a borrower knows they are running close on income to satisfy the required debt-to-income ratio required for approval and they are desperate for a car, they are more likely to make up as much as they can to drive off. The pandemic brought about income disruption, higher prices, and an inventory crisis that has made cars scarce…this makes for a perfect storm for borrowers looking for anything they can drive off in and willing to break the rules to do it.

Simple tips to spot income/employment fraud

F&I managers may think this has never happened or if it does, they should be able to quickly spot fraudulent documents or sniff out overstated income. There are some strategies to employ in every deal that can keep this from being an issue at your store.

• Job Title – Watch for generic job titles like ‘manager’ or ‘office manager’. Many fraudulent borrowers will try to keep their position as bland and general as possible to not send up any red flags. ‘Sales’ is another non-specific title. Ask what kind of sales if you have time. Outside? Inside? Telesales? See if they answer with more detail or if they avoid the question.

• Income/Salary or Wage – Many who get coached on how to ensure a rapid approval will tell a borrower to keep their stated income in the $60-80k per year range. It’s simple to see why. It’s a range that is not too little but not too much either. They will feel it hits that ‘sweet spot’ for a decent debt-to-income ratio. The reality is income is generally more precise than simple round numbers. 

One tip to see if this income is being overstated is to simply ask for the borrower to verify what their monthly or weekly income is without looking at the credit app (assuming they don’t have a paystub available). If they can’t come up with the numbers to equal their stated yearly income off the top of their head, it’s probably not correct. Most of us know that number.

• Fake Employer – As crazy as this sounds, it’s a type of fraud that is on the rise according to Point Predictive. Borrowers literally make up an employer, giving an address and phone number that may SEEM legitimate but is not upon closer scrutiny. 

Checking online is a great way to quickly see if the company exists. Does their website look ‘complete’? Is it one page or are there multiple pages showing a robust business and services offered? And even more revealing still, check the address supplied against Google Earth to see what’s REALLY at that address. That’s always fun when you see it’s an empty lot somewhere in town.

And don’t forget to be sure the paystub you are shown is real. There are companies all over the internet that will help you create a fake paystub. Check it for inaccuracies, misspellings, bad math, and flimsy paper. 

It’s always a good idea to review fraud discovery techniques as a yearly or even quarterly F&I topic with your team. As they say, to be forewarned is to be forearmed and in the crazy environment the industry is working within, you simply can’t be too careful.